IRS approves direct scholarships for public-service graduate fellows

Plain-English summary

A private foundation supports graduate students at partner universities who commit to federal government service for at least three of their first seven years after graduation. The foundation historically funded the universities, which then administered scholarships, stipends, and health coverage, but proposed paying some fellows directly when university overhead costs were excessive. Partner universities would select fellows through nondiscriminatory procedures, while the foundation would monitor reports, renew awards based on compliance, recover diverted funds, and maintain complete records. No award could go to insiders, their families, or other disqualified persons. The IRS approved the procedures under § 4945(g)(1), so qualifying scholarship expenditures would not be taxable expenditures and amounts used for qualified tuition and related expenses would be excludable subject to § 117(b).

Ruling snapshot

• Question: Did the foundation's procedures for directly paying and supervising graduate fellowships qualify for advance approval under § 4945(g)(1)?
• Outcome: approved (scholarships awarded under the described procedures will not be taxable expenditures)
• Key authorities: IRC §§ 117, 170(b)(1)(A)(ii), 170(c)(2)(B), 4945(g)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Number: 202036006
Release Date: 9/4/2020
Employer Identification Number:

Date: JUNE 11, 2020
Contact person - ID number:

Contact telephone number:

LEGEND UIL: 4945.04-04

X =
b dollars =

Dear

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code (IRC) Section 4945(g). This approval is required because
you are a private foundation that is exempt from federal income tax. You requested
approval of your scholarship program to fund the education of certain qualifying
students.

Our determination

We approved your procedures for awarding scholarships. Based on the information
you submitted, and assuming you will conduct your program as proposed, we
determined that your procedures for awarding scholarships meet the requirements
of IRC Section 4945(g)(1). As a result, expenditures you make under these
procedures won't be taxable.

Also, awards made under these procedures are scholarship or fellowship grants and are
not taxable to the recipients if they use them for qualified tuition and related expenses
(subject to the limitations provide in IRC Section 117(b)).

Description of your request
Your letter indicates you will operate a scholarship program.

Your purpose is to strengthen the US government and increase its ability and
determination to defend and extend freedom throughout the world by improving the
training and education of men and women for government service.

You fulfill your purpose by providing scholarships to participants of X. Under X, graduate
students at select partner universities receive full scholarships, living stipends, and health
insurance coverage in exchange for a commitment to work for the federal government for
a minimum of three of their first seven years after graduation.

Letter 4792 (10-2012)
Catalog Number 58263T

Graduate students at your partner universities can apply to become Fellows through their
graduate programs. In general, you provide funding to each of the partner universities to
support two to five Fellows per graduating class. Each partner university selects the
individual Fellows in accordance with its own application process and approval
procedures. Fellows are selected on a nondiscriminatory basis from among the graduate
students accepted to the program who are willing to make the commitment to working for
the federal government and are generally evaluated on their academic performance,
professional experiences, and career goals.

Historically, you have supported X with grants to the partner universities. The partner
universities then manage the grant funds and control the distributions to the Fellows to
cover tuition, room and board, associated academic and living expenses, and health
insurance. You intend to maintain these procedures for most fellowship awards.

In situations where substantial overhead costs make this cost prohibitive, you intend to
restructure the flow of funds for certain Fellows so that they receive the scholarships
funds directly, restricted to cover costs of tuition, books, health insurance costs and
university health fees, and living expenses associated with attendance at their graduate
program.

You requested approval for the procedures set forth below:

(a) Recipients of the scholarships will be chosen from among students who have been
accepted as Fellows at a partner university; thus, recipients will be chosen from a
pool of applicants admitted to study at one of the partner universities graduate
programs and selected through the nondiscriminatory procedures of that
university.

(b) Although each partner institution manages the selection process for Fellows
independently, all of the programs generally select students based on applicants’
demonstrated leadership potential, sincere commitment to federal public service,
and prior academic achievements.

(c) You will make the determination, solely in your discretion, which Fellows receive a
direct scholarship, and which receive a scholarship paid and managed through the
partner universities. These decisions will be based on whether the overhead costs
charged by partner institutions to administer the funds are considered excessive
relative to your costs to distribute the funds directly to the Fellows.

(d) You will not discriminate on the basis of race, religion, creed, color, sex, age,
physical or mental disabilities, sexual orientation, or national origin. All awards will
be made on an objective and nondiscriminatory basis.

(e) Any unused funds will be transferred back to the you.

(f) The exact number and amount of scholarships in a given year will depend on a
number of factors, including the number, qualifications, and particular needs of the
applicants. The amount of the Scholarship for a particular Fellow may vary based
on the financial needs of the Fellow and expected costs of his or her graduate
program but may be as high as b dollars per year. At this time, you anticipate

Letter 4792 (10-2012)
Catalog Number 58263T

awarding scholarships to approximately two to four Fellows each year and that
could increase to as many as ten scholars in future years.

(g) No scholarships will be awarded to your founders, directors, officers, or staff, or

their families, or to any disqualified person with respect to you, or for a purpose
that is inconsistent with the purposes set forth in IRC Section 170(c)(2)(B).

(h) Where you award a Scholarship directly to a Fellow, you will require the Fellow to

(i)

(j)

furnish annual reports of the courses taken and grades received during each
academic period. The reports must be verified by the institution in which the
recipient is enrolled. Where a Fellow’s course of study involves the preparation of
research and projects instead of coursework, you will require the recipient to
furnish annual progress reports that are approved by a supervising faculty member
or other appropriate university official. Upon completion of a Fellow’s course of
study at an institution, you will require the recipient to furnish a final report.

A Scholarship may be renewable at the end of each academic year, through the
completion of the Fellow’s current program. Fellows must meet certain criteria to
be eligible for scholarship renewal, including compliance with all reporting
requirements described above.

If a required report is not submitted, if the submitted report is unsatisfactory, or if
you learn that all or any part of the funds from a scholarship it has awarded are
being diverted from their intended purposes, it will take all reasonable and
appropriate steps to recover the funds or to ensure restoration of the diverted
funds to the purposes of the program. These steps would include legal action if
deemed appropriate under the circumstances.

(k) You will retain complete records with respect to all scholarships awarded, as

required by the applicable Treasury Regulations. These records will include all
information obtained by you to evaluate applicants, the identification of recipients,
the completed application of each recipient, the amount of each grant, periodic
reports from recipients, and any additional information that you have obtained in
the course of the grant-administration process.

(l) You will report all scholarships awarded on an annual basis on your Form 990-PF.

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(IRC Section 4945). A taxable expenditure is any amount a private foundation pays as a
grant to an individual for travel, study, or other similar purposes. However, a grant that
meets all of the following requirements of IRC Section 4945(g) is not a taxable
expenditure.

• The foundation awards the grant on an objective and nondiscriminatory basis.
• The IRS approves in advance the procedure for awarding the grant.

• The grant is a scholarship or fellowship subject to the provisions of IRC Section
117(a).

• The grant is to be used for study at an educational organization described in IRC
Section 170(b)(1)(A)(ii).

Letter 4792 (10-2012)
Catalog Number 58263T

Other conditions that apply to this determination

• This determination only covers the grant program described above. This approval
will apply to succeeding grant programs only if their standards and procedures
don't differ significantly from those described in your original request.

• This determination applies only to you. It may not be cited as a precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You must report any significant changes to your program to
the Cincinnati Office of Exempt Organizations at:

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

• You cannot award grants to your creators, officers, directors, trustees, foundation
managers, or members of selection committees or their relatives.

• All funds distributed to individuals must be made on a charitable basis and further
the purposes of your organization. You cannot award grants for a purpose that is
inconsistent with IRC Section 170(c)(2)(B).

• You should keep adequate records and case histories so that you can substantiate
your grant distributions with the IRS if necessary.

We've sent a copy of this letter to your representative as indicated in your power of
attorney.

Please keep a copy of this letter in your records.

If you have questions, please contact the person listed at the top of this letter.

cc:

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4792 (10-2012)
Catalog Number 58263T